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Hojgaard: Supreme Court rules on a fitness for purpose dispute

August 2017 - Issue 96

On 3rd August 2017, the Supreme Court upheld an appeal in the MT Hojgaard v EON litigation, restoring the TCC’s original decision and finding the contractor liable to comply with a fitness for purpose obligation contained in a Technical Schedule despite obligations elsewhere in the contract requiring the contractor only to exercise reasonable skill and care and comply with an international standard. The decision will have significant ramifications for the interpretation of construction contracts, which commonly incorporate Technical Schedules and other specification documents within their terms.

The Contract comprised what appeared to be conflicting obligations and technical requirements. The conditions of the Contract required Hojgaard to design, manufacture, test, deliver and install and complete the Works using due care and professional skill and also to ensure that the Works were fit for purpose. Fitness for purpose was to be determined by reference to adherence with the Technical Requirements. The Technical Requirements formed part of the Employer’s Requirements of the Contract and were below the conditions of the Contract in order of precedence.

The Technical Requirements required the foundations to be designed so that they –

Complied with an international standard for the design of offshore wind turbines, known as J101; and,

Ensured a lifetime of 20 years in every respect.

These were stated to be “MINIMUM” obligations. The Contract and J101 also included separate obligations to achieve a design life of 20 years.

EON issued proceedings in the TCC for the recovery of the remedial works costs, which amounted to €26 million.

Technology and Construction Court

In April 2014, the Technology and Construction Court held that Hojgaard was liable to EON for breach of contract because the design of the foundations was not fit for purpose. The court’s reasoning was based on two paragraphs in the Technical Requirements section of the Employer’s Requirements schedule to the contract, which required that the design of the foundations “shall ensure a lifetime of 20 years in every aspect without planned replacement” (the “TR Paragraphs”). This provision applied in addition to Hojgaard’s other less onerous obligations such as a requirement to exercise reasonable skill and care and to comply with an international standard for the design of offshore wind turbines.

Compliance with J101 was also intended to bring about a service life of 20 years, subject to a probable rate of failure of between 1 in every 10,000 to 100,000 installations. As a matter of professional design practice, the adoption of J101 was consistent with a desire to achieve a design life of 20 years and Hojgaard reasonably relied on the standard in preparing its design. However, J101 contained a significant error, not known about at the time the contract was entered into, which dramatically reduced the service life of the foundations. Compliance with J101 did not therefore provide a design life of 20 years in reality.

Court of Appeal

Hojgaard appealed and the Court of Appeal overturned the Technology and Construction Court’s decision in May 2015. The Court of Appeal held that if one was confined to the Technical Requirements, Hojgaard’s obligation to ensure a lifetime of 20 years appeared to be a warranty that the foundations would function for 20 years. However, given the inconsistencies between the obligations under the Technical Requirements (which required Hojgaard to achieve a lifetime of 20 years) and the Contract (which required Hojgaard to exercise “due care and professional skill” and achieve a design life of 20 years), the Court of Appeal held that this requirement of the Technical Requirements was “too slender a thread” upon which to hang a finding that Hogjaard had given a lifetime warranty of 20 years for the foundations.

Supreme Court

In a unanimous decision on 3rd August 2017, the Supreme Court overturned the Court of Appeal’s decision and restored the decision of the Technology and Construction Court.

The central question was whether, given the obligation to ensure a life for the foundations of 20 years, Hojgaard was in breach of contract, despite the fact that it used due care and professional skill, adhered to good industry practice, and complied with the industry standard.

The Supreme Court held that Hojgaard was liable for the cost of remedial work. They reached this decision for three reasons -

As a matter of law, if a contractor agrees to both work to a specific design and to achieve a specified result, if the design does not achieve the result, the contractor will be in breach.

The Technical Requirements specified that the standards it set out were “MINIMUM requirements” and that it was Hojgaard’s responsibility to identify any additional or more rigorous requirements.

The Court of Appeal’s conclusion that the wording of the Technical Requirements was “too slender a thread” was wrong. There were clear words in the contract that indicated that Hojgaard was to achieve a 20 year design life.

Thus carefully adhering to the detailed contractual specification will not relieve you of an overarching obligation, which in this case, was the 20 year warranty.

Implications of this decision

The decision in this case will have significant implications in the interpretation of construction contracts. Construction contracts regularly incorporate specifications, technical documents and employer’s requirements; sometimes with more onerous obligations than the conditions of the contract themselves.

The judgment highlights that obligations, such as fitness for purpose warranties, which are “tucked away” in technical specifications and/or schedules to a contract can still impose additional duties on contractors and/or consultants, despite overarching obligations in the primary contract documents to exercise reasonable skill and care.

The judgment also highlights that contracts can impose dual obligations. For those with design responsibility, this calls into question whether a reasonable skill and care or fitness for purpose obligation takes precedence. Further, we often see fitness for purpose obligations which are “subject to reasonable skill and care”. Following this case, it seems that there is a real risk that the “subject to reasonable skill and care” wording does little to water down a fitness for purpose warranty given the risk of dual obligations.

With this in mind, contractors and consultants alike are advised to review their obligations carefully to ensure that they are drafted properly to reflect what the parties understood the contract to require. It is important to review, from a legal point of view, Technical Schedules and documents referred to in or appended to contracts to ensure that duties, obligations and scope are no wider than intended by the contracting parties. This is because, as shown in this case, the literal interpretation of contract provisions may be given weight by the courts. Parties may also wish to consider express wording in contract conditions to address how Technical Schedules or appendices affect contractual obligations. This may include wording giving priority to the contractual provisions over the Technical Standards and highlighting that the Technical Schedules impose no greater or longer lasting duties.